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This week we are returning to the topic of the Walmart Deferred Compensation Matching Plan (DCMP.) Previously, we reviewed the case of Samantha, a Walmart Vice President approaching retirement. The combination of a high tax rate (>32%) and close proximity to retirement (5 years) favored an aggressive Walmart DCMP strategy for Samantha. If you missed it, here is a link: Taxes and Retirement: A Walmart DCMP Case Study!
In this article, we are looking at the case of Jeremy, a Sr. Director at Walmart. In contrast to Samantha, Jeremy is not deep into the highest tax brackets AND is planning to continue working for another 15 years. Does the Walmart DCMP make sense for Jeremy? Well, it depends....
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A Walmart Deferred Compensation Matching Plan Case Study - Jeremy the Walmart Senior Director
Jeremy (43) is a Senior Director at Walmart. He enjoys working at Walmart, but he has never worked more than 5 years at any one company. For that reason, he does not expect to finish his career at Walmart.
Jeremy is married to Amanda (41) who left her position working for a Walmart supplier to spend more time with the couple's three daughters ages 14, 12 and 6.
Jeremy contributes the maximum amount to his Walmart 401(k) and Health Savings Account (HSA) but he has not contributed to the Walmart DCMP. As a Sr. Director, he is eligible to contribute up to 80% of his Management Incentive Plan (MIP.)
A few of Jeremy's colleagues have been discussing the Walmart DCMP leading up to the election window in December. The colleagues asked Jeremy why he is not participating in the Walmart DCMP and Jeremy realized the reason is mostly due to simple inertia. This year Jeremy wants to evaluate and make an active decision on whether he should or shouldn't contribute to the Walmart DCMP.
For any participant, the first step in evaluating your Walmart DCMP decision is to determine if the Plan will significantly reduce your tax expense?
Before we evaluate the tax savings potential for Jeremy, here is a current snapshot of the family finances:
Will the Walmart DCMP Reduce Jeremy's Tax Expense?
The primary reason to participate and contribute to the Walmart DCMP is to reduce your tax expense. If the Plan does not significantly reduce your tax expense, it is difficult to justify participating due to the accompanying risks: lack of liquidity, credit risk and less control over taxable distributions.
Generally, it makes the most sense to contribute to the Walmart DCMP when your marginal tax rate is 32% or higher. In other words, using the Walmart DCMP to reduce taxable income to $364,200 for Married Filing Joint and $182,100 for Single Filers yields the largest marginal tax benefit (2023 Tax Brackets.)
In my opinion, the Walmart DCMP would not reduce Jeremy's tax expense enough to justify contributing to the Plan. The family's taxable income is ~$367,000 once you account for deductions. Taxable income is only slightly over the $364,200 threshold for Married Filing Jointly taxpayers. In other words, essentially all of the family's income is taxed at 24% or less - only $2,800 is taxed at 32%.
Recommendation: In the scenario that Jeremy is the sole earner, he should not participate in the Walmart DCMP.
Dual Income Scenario: Amanda Returns to Work
Now let's assume Jeremy's wife, Amanda, resumes her career and is earning $130,000 on top of Jeremy's Walmart compensation. The incremental income from Amanda pushes the family into the 35% marginal tax bracket. In this case, I would agree that the Walmart DCMP offers an opportunity for significant tax savings. A different Walmart DCMP strategy should be considered.
Now that more income is pushed into the higher 35% marginal tax bracket, Jeremy and Amanda have a decision to make. Jeremy can contribute up to $76,000 into the Walmart DCMP which would reduce taxable income to $399,000. As a result, the couple would reduce their tax expense by $25,000 from $110,000 to $85,000 in the current tax year.
Sounds like a "no-brainer", BUT there are risks Jeremy and Amanda need to consider...
Risk #1: The Walmart DCMP distributes taxable income while the couple is still earning a high income. The Walmart DCMP typically starts distributing a year after the participant leaves Walmart. For example, if Jeremy accepts a job at a different company for a higher income, the Walmart DCMP distributions may push the couple into an even higher tax bracket.
Risk #2: Increased credit risk. Even if Jeremy works another 15 years and retires from Walmart, 15 years plus the distribution period is a long time. Yes, Walmart is unlikely to default on their debt obligations - which include the Walmart DCMP - but a lot can happen in 15 - 20 years. It is a risk - even if unlikely - that you are not really compensated for.
Dual Income: Should Jeremy Contribute to the Walmart DCMP?
Recommendation: In the scenario that Amanda is now earning a second household income, Jeremy should contribute $30,000 to the Walmart DCMP with a 5-year annual installment distribution schedule.
Jeremy is eligible for a 6% match on up to $30,000 contribute to the Walmart DCMP ($1,800.) Not life changing money, but it helps compensate for the above-mentioned risk. Also, the 5-year installment period minimizes the taxable income in case Jeremy leaves Walmart for another high paying position.
Additionally, there is a 3-year vesting period for the Walmart DCMP 6% match. By contributing today, Jeremy starts the clock on the 3-year period. In the case that he is promoted to Officer, he will want the 6% match to vest immediately as Officers are eligible for a larger match.
Finally, Jeremy and Amanda are still early in their careers. Even if their compensation levels remain the same, there is plenty of time to build these retirement accounts. Of course, it is still financially prudent to save a portion of the $300k+ after tax income in the brokerage account and 529 Plans.
Wrap-Up
The Walmart DCMP offers participants an opportunity to build their wealth by significantly reducing their tax expense, but the Plan is nuanced and restrictive. The first step to consider is the potential tax savings benefit you would receive from the Plan. Without a significant tax benefit, it is often difficult to justify participating in the Plan. Of course, everybody's situation is different.
I hope you found the article helpful as you navigate your personal finances at Walmart. If you are interested in scheduling a free consultation to discuss your particular situation, you may schedule some time on calendar.
Mark Chisenhall, CFA is the founder of Taurus Financial Planning, a Bentonville, AR wealth management firm specializing in helping Walmart Vice Presidents and Sr. Directors reduce taxes, optimize investments, and accelerate retirement.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation.
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